The tax cut that failed

This is a great opening line by Michael Cooper: "What if a president cut Americans’ income taxes by $116 billion and nobody noticed?"

It happened, of course. But the nobody noticing was by design. The Making Work Pay tax credit was built for stealth. Working off of economic evidence suggesting that people are more likely to save a one-time windfall than a small increase in wages, the tax cut was used to lower the amount of tax withholding in people's weekly paychecks. The hope was that they would spend it, and it would thus do more to stimulate the economy.

This created two political problems for the tax cut. First, it was invisible. A recent CBS/NYT poll showed that fewer than 10 percent of Americans knew Obama had cut taxes. Second, because the administration had a distinct tax-cut design in mind, they added that to the stimulus rather than giving Republicans space to negotiate out a tax-cut portion that they would own. Obama has repeatedly named this as one of his major political mistakes.

Of course, if the tax cut's design had been much more effective at improving the economy, that would be of more political benefit than headlines or a brief moment of Republican buy-in. But the early research (pdf) on that front is not promising: It looks like it may have been less stimulative than a traditional tax cut.

It's a story that reflects both positively and negatively on the administration. The positive side is that they sacrificed politics and messaging for good policy. They were willing to forgo the headlines and the chance to force Republicans to own something if it meant improving the economy. The negative side, of course, is that it doesn't seem to have worked.

Please clarify: if withholding amounts were reduced, but the tax table didn't change, that would amount to a deferral, not a cut. Was the final tax liability actually reduced, or is this just another stretch?

I think a lot of middle-class folks didn't actually realize an increase in take home pay due to huge increases in the amounts deducted for their health insurance. So, yeah the tax decrease helped cushion the blow, but it wasn't like anyone actually had significant amounts of new money to spend.

Greetings.
In response to your 5 people the President should hire piece.
For Polit. Sci., how about
Prof. Matthew Dickinson, a Neustadt disciple,Harvard Ph.D. and former prof. who writes a blog 'Presidential Power-A Non-Partisan Analysis of Presidential Politics', and teaches at Middlebury College?

" Working off of economic evidence suggesting that people are more likely to save a one-time windfall than a small increase in wages, the tax cut was used to lower the amount of tax withholding in people's weekly paychecks."

It wasn't a small increase in wages. It was a one-time windfall that also happened to be hard to notice.

The reason small increases in wages are more likely to be spent is because the wage increases are perceived as permanent.

Of course, national savings has been and remains too low, so perhaps the decision by households to save what the government borrowed to give them isn't that bad after all.

Forget about the politics of it, there are problems with either tax cut method. With the Obama tax cut, it was simply too small either at the individual level or the aggregate to be very effective. If you are bringing home, oh say, $517 a week are you really going to notice that you are now bringing home $522? even if you should notice that, will it modify your behavior in any drastic way? Not likely, because the amount is too small. You might buy a larger size coffee on occasion, but not make what policy makers would consider needed spending changes to make a difference. With the windfall, yes there is the potential that people might save a portion or all of it, but there is also the argument that at least some will think of it as free money and spend it (on one big item or a couple of smaller items) on an item they would not have other wise bought. That is exactly what I did with the Bush tax cut. Spent it on a small home project, that we had been putting off - wouln't have done it with the Obama cut. Unfortunately, just like with the home buyer credit and cash for clunkers, the problem with the windfall is that it is a one time thing. You'll see a spike in spending and then nothing, so unlike in cardiac arrest where a jolt from a defibrillation device will lead to a prolonged continuously beating heart, the jolt from a one time windfall won't produce the same economic effect, again witness the effects of the Bush windfall tax cut, home buyer credit and cash for clunkers. Oh, and do I need to mention the deficit implications?

"They were willing to forgo the headlines and the chance to force Republicans to own something if it meant improving the economy."

They lost that battle.

"The negative side of course, is that it doesn't seem to have worked."

Going to lose the war (2010 mid-terms).

In a nutshell, they tried to game wage earners' psychology and lost.

Those who placed that wager (or provided the rationale for that wager) are long gone and won't have to face the consequences. It's something like the execs who put their corporations on the line, took bonuses on phantom short term profits, and got out before the house of cards collapsed.

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